Good Samaritan could create gift tax problem

Q&A: I have a friend who through no fault of his own is in a stressful mortgage situation. My wife and I are thinking of clearing a chunk of his mortgage for him. It could be us if the cards if life fell differently.

Your query response a few weeks ago re gift tax has raised the issue of whether we will be creating another problem. Will my friend be liable for gift tax on any help we give? This would seem severe in the situation where he is at risk of losing his home. Is there any way of avoiding this problem?

Mr GK, Dublin

Your instincts are commendable but, as you now realise, they could present problems for the recipient of your generosity. That aside, I would also counsel that you make no move without first sounding out the attitude of your neighbour. The sensitivity of people on financial matters, especially their own financial troubles, can be acute.

Should you proceed in the manner you suggest, you would indeed likely run into problems with gift tax. You are free to gift €3,000 to your friend this year and each successive year without having to worry about gift tax. Your wife can also gift the same amount to him each year. If he has a partner, spouse, you each can gift the same amount to them.

After that annual exemption of €6,000-€12,000 between you to this homeowner and any partner, gift tax comes into the picture.

Assuming there is no blood relationship between you, this friend is considered a Category C “stranger” for the purposes of gift tax/capital acquisitions tax. On that basis, there is a limit of €16,750 he can receive (over and above the €3,000 per person annual small gift exemption) before finding himself liable to gift tax at 30 per cent.

There are certainly ways of sidestepping this, but they are more complicated. You might need to “gift” any amount above the €3,000 a year as a loan. Revenue would want to be reassured that it was indeed a loan and not a gift, but it could provide your friend with the necessary space to get his affairs in order.

A third option, more complicated again, would be to purchase part ownership in the property, but this would have attendant costs and, in any case, would be a very sensitive matter.

Is now the time for a punt on shares in Irish Life?

Would now be a good time to buy Irish Life shares?

Mr JS, email

It might be . . . if they were available. Irish Life, the life insurance arm of Irish Life Permanent, has been spun off and acquired by the Government. It may be that, at some point in the future, the State will refloat the business or, alternatively, sell it on to an industry buyer.

Irish Life was in recent years a strong business and had provided cover for the group’s poorly performing banking business.

However, for the moment, it is the sole shareholder of the business, so shares are not available.

As to the rump Permanent TSB business, as with all Irish banks, its medium-term future is far from certain. As of now, the State owns all bar 0.8 per cent of the business. That 0.8 per cent is owned pro rata by all the group’s previous shareholders – ie their shareholding has been diluted from 100 per cent ownership to just 0.8 per cent as part of the State recapitalisation of the group.

As it is still a listed company, it is possible to buy shares in the business – and there is some aspiration again to develop Permanent TSB into a third force in Irish banking. But, as with all Irish banking shares at the moment, an investment here would be a high risk move and should be assessed in that light.

Caught on transfer from discount mortgage rate

I have a mortgage with Permanent TSB. Initially, it was a one-year discount tracker. After that first year, we opted for a LTV<80 per cent rate of 3.3 per cent (which was less than the tracker on offer at the time). Now the rate we are being charged is 4.69 per cent (after the latest announcement of a 0.5 per cent reduction from PTSB), which is the same as the standard variable rate. So we are seeing no benefit from the LTV<80 per cent.

I also see from the PTSB website that the rate for new business for LTV<80 per cent is 3.69 per cent and the rate for standard variable 4.69 per cent. Is there anything I can do about this or am I just stuck with it ?

Mr SH, email

It’s always open to you to approach either your own lender in relation to the rate being charged or to investigate the possibility of moving to other lenders.

Permanent TSB has been anything but competitive on mortgages for a long time now, even with its recent half point cut in interest rates.

That aside, there is little enough you can do. By your own admission, you chose to move to this rate after the one-year discount tracker.

It is a salutary warning and one that has been raised time and again even during the boom – don’t get blinded by initial offers. A mortgage is a 20-40 year commitment and a one-year offer that locks you into an uncompetitive rate for the remained of the mortgage is an expensive mistake.

As to more favourable rates on offer to new business, that is a common feature of both mortgage and credit card businesses. Again, people are advised to consider the longer term rate projections beyond the lifetime of the new business offer.

This column is a reader service and is not intended to replace professional advice. Please send your questions to QA, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin 2, or to dcoyle@irishtimes.com. No personal correspondence will be entered into.